New York Times by Steven Rattner<\/a>, \u201cSaving Young People from Themselves,\u201d which argues in favor of mandatory retirement savings, though it spends most of its time on generalities (and McArdle\u2019s response raises various complications, again, in general).<\/p>\nFirst of all, some context. <\/p>\n
Our Social Security system is not designed to integrate well with retirement savings programs, whether individual savings or company contributions to a 401(k) account. \u00a0Its formula with \u201cbendpoints\u201d replaces 90% of the first, roughly, $10,000 in annual, indexed, averaged wages, 32% of the next $50,000, more or less, and 15% of average wages after that \u2014 which means that a person who simply has always been very poor will do quite well on Social Security, relative to their meager preretirement income, and the amount of preretirement income Social Security replaces decreases as one\u2019s income grows.<\/p>\n
In the two most well-known countries where retirement savings is based on a \u201cprovident fund\u201d concept, with mandatory contributions to private funds, Hong Kong and Australia, the Social Security benefits are radically different: \u00a0flat amounts which are means-tested. \u00a0In Hong Kong, Social Security is basically \u201cwelfare for the old\u201d with fairly stringent tests and paid from the same programs as cover the non-elderly poor, except that there\u2019s no requirement to look for work. \u00a0In Australia, Social Security benefits have a more gradual phase-out, and workers generally have the expectation (in part because the \u201cprovident fund\u201d system, a requirement that employers contribute 9% of pay \u2014 increasing to 13% of pay over the next couple years \u2014 is relatively new and account balances are low) that they will spend down their account balances in the early years of their retirement and go on Social Security when their funds are exhausted.<\/p>\n
Other countries, most significantly some former Warsaw Pact countries, follow a \u201cWorld Bank\u201d model. \u00a0Employer and employee are required to contribute a fixed sum of money to retirement savings. \u00a0Part of this is just on paper, with the money going to a pay-as-you-go system in which the \u201caccounts\u201d grow based on some declared interest rate each year and are converted to annuities at retirement based on longevity factors at the time of retirement. \u00a0This is just another sort of Social Security system, but one that, hopefully, responds better to changes in economic and demographic conditions than \u201c80% of pay for life\u201d as many of the old systems had. \u00a0But the other part is contributions to real, funded, private accounts \u2014 though many of these systems are struggling to pay the existing obligations and keep tweaking the portion of the contributions that go to pay-as-you-go accruals vs. funded accounts. <\/p>\n
At any rate, in this sort of system, there\u2019s generally a minimum benefit provision, which stipulates that the government will top up benefits as needed to get you to a minimum level, such as minimum wage.<\/p>\n
Which means that implementing a \u201cblind\u201d X% of pay mandatory contribution really would need to be paired with a bigger reform in our Social Security system. \u00a0Outside of this, auto-enrollment is probably the better option, along with greater awareness of the drop-off in Social Security income as a percentage of wages as those wages grow.<\/p>\n
What\u2019s more, let\u2019s think about income levels and ages:<\/p>\n
It does not make sense to mandate a contribution for people whose income is so low that they are already dependent on government benefits, or for whom pulling an extra 5% out of their paycheck would push them into financial distress. \u00a0It does not make sense for the government to subsidize the poor with extra funds in their savings accounts, when neither the government nor the poor themselves know whether, at the time of retirement, those individuals will be poor any longer \u2014 far better to simply provide sufficient minimum-level benefits at retirement. \u00a0(If nothing else, consider those \u201cpoor\u201d who are college students working a part-time job \u2014 should the taxpayer be kicking cash into their retirement accounts?)<\/p>\n
And it also does no good to base retirement savings requirements off a model that presumes you\u2019ll need a fixed percentage of your pre-retirement income, adjusted for inflation, for the rest of your life. \u00a0Living expenses do decline significantly for the very old, except for medical costs. \u00a0And, for the very old, I don\u2019t think Medicare + supplemental insurance should be requiring significant cost-sharing (deductibles, etc.) because the very old are generally not in a position to be the sophisticated decision-makers high-deductible plans want us to be. \u00a0(Brand-name or generic drug? \u00a0my dad can barely keep track of the medications in the first place, let alone assess what the right ones should be. \u00a0The very old need to be in well-run HMO-type plans where the doctor makes that choice based on cost, effectiveness, side effects and so on.)<\/p>\n
But, that being said, we do need to do something. \u00a0We are reaching uncharted territory, as most middle-class retirees and near-retirees have Defined Benefit pensions from their employers. \u00a0Even though DB pensions have virtually disappeared in the private sector, these plans were generally grandfathered to provide near-retirees with continued accrual, and, even in those cases where the plans were frozen, existing accruals are protected by law. \u00a0We have not yet reached that point where the large majority of retirees do not have pension benefits. \u00a0To wait until that happens will be too late.<\/p>\n
And it\u2019s not just a matter of retirees being unhappy with their lot. \u00a0It\u2019s a matter of increased burdens on taxpayers, and not just through more food stamp recipients than otherwise, for instance, and other burdens on programs directly targeting the very poor. \u00a0There are also plenty of benefits out there for moderate-income seniors \u2014 for instance, around here, a senior can have income of up to $50,000 and still qualify for a assessment freeze for their property taxes \u2014 and one can well imagine that there will be a push for more such benefits over time as well.<\/p>\n
<\/p>\n<\/body><\/html>\n","protected":false},"excerpt":{"rendered":"
Megan McArdle has an article out discussing an opinion piece in the New York Times by Steven Rattner, \u201cSaving Young People from Themselves,\u201d which argues in favor of mandatory retirement savings, though it spends most of its time on generalities (and McArdle\u2019s response raises various complications, again, in general). First of all, some context. Our […]<\/p>\n","protected":false},"author":2209,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[450],"tags":[],"class_list":["post-541","post","type-post","status-publish","format-standard","hentry","category-actuarial"],"yoast_head":"\n
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